Too Good To Be True

In the past 2 weeks we have all been following the almost totally unbelievable gigantic Ponzi Scheme pulled off by one of the world’s most respected investors, Bernie Madof. For over 40 years he produced astounding yields year after year that pleased and attractred billions of investment dollars so the newspapers say.

The crazy part of this was that not only were those returns unbelievable, they were not supported, even by the monthly statements sent to his investors, per various newspaper, magazine and internet articles. Anyone given the returns and the information given to support those returns would see that they were impossible to have occured.  But no one questioned him and it was he and his sons who finally confessed his wrong doings, not some disgruntled investor.

Whether it’s pure greed or our human need to believe in other fellow human beings, I don’t know.  After all who would be low enough to steal and ultimately bankrupt charities, friends and even relatives.  Sure, we have all seen and heard of people stealing some toys from children or the collection plate at church but those perpetrators are hardend criminals, probably on drugs and likely very poor. Not some centimillionaire or billionaire that couldn’t possibly need to steal.

The adage that if it is too good to be true it probably isn’t, kicks in here.  Yet we all want to believe that we can trust the wealthy investment advisor or the public corporation.  Unfortuanately that trust is often misguided.

I have seen people, time after time, pushing to buy a commercial property based upon projections that not only show wild increases in income but spectacular inceases in value.  Try as you might to bring a modicum of reality into their calculations they just don’t want to hear it.  In fact if you are a Commercial Real Estate Broker, they will forget about you and find someone who sees numbers through the same rose colored glasses if you don’t agree with craziness.

Although I do not deal in apartment properties with less than 5 units, I have been approached numerous times by so called investors who wanted me to find them a triplex or 4 plex that they could buy with 10% down (which they could until about a year ago) that would be a good investment.  Well the fact of the matter is that in the last 6 years buying a property in that way would invariably end in a substantial negative cash flow.  Interestingly enough for about 3 years people could buy that way and sell the property at a profit albeit less than they thought when one counts the money needed to feed the property during the holding period.

There are many California investors who levereged into Florida properties that became virtually worthless in 2007.  Not only were they left putting substantial cash into the property every month but they had no one to buy the property from them at any price.  Foreclosure was the only avenue open to them.  I am not saying these were crooked deals but they were often over sold by zeolous sales people who knew better or in many cases were so ignorant they didn’t know better.

Because the theory of leverage investing in real estate is so attractive, people often forget that the same basic principals pertaining to buying a business or investing into a company still apply.  If the property doesn’t pencil when you buy it then you better have a good business plan to rationalize what is gong to change to make it pencil in the near future.  That rationalization needs to be clear and based upon current data not pie in the sky projections of the market always going up wildly.

As of December 2008, I am just starting to see some decent real estate investments come up.  Prices are starting to be based upon today’s numbers not what may happen in 2 or 3 years time.  Financing is tougher to get but we are still getting commercial real estate financed if the borrower is qualified and the property has real numbers attached to it.

Is it wise to start getting back into the investment real esate market? Yes, because buying when property values and interest rates are low makes solid sense.

Will investment real estate prices fall some more in 2009?  Probably, but one can get a deal at any time in the market if solid investment parameters are followed.

Will investment real estate prices start to rise again?  Yes but may not until 2010.  However, if a property was bought right and a holding period of 3 to 5 years is part of the plan then the investment will probably be a winner.

Should we never trust anyone again?  That would really be a terrible way to live. It’s nice to trust people but it is also nice to do your due diligence when dealing with someone responsible for your money. Americans are very trusting people which makes this a great country in which to live but it also allows for the scoundrels among us to flourish. 

Lets just agree to trust in a prudent way.

Tags: caluclations, commercial broker, commercial real estate, due diligence, investment real estate, leverage in real estate, trust